For Proxy Advisers, Influence Wanes

By

Joann S. Lublin and

Kirsten Grind

May 22, 2013 7:10 p.m. ET

The landscape for proxy advisers is getting rockier.

Big firms that sell recommendations on how to vote in corporate elections are losing some of their relevance, as companies more aggressively court key investors ahead of big votes and those investors handle more of the voting analysis themselves.

Consider J.P. Morgan ChaseJPM-0.74% & Co. The two biggest proxy advisers—Institutional Shareholder Services Inc. and Glass, Lewis & Co.—recommended that shareholders support a nonbinding proposal to split the roles of chairman and chief executive held by James Dimon.

But the nation's largest bank by assets mounted an unusually intense shareholder lobbying effort to defeat it. And at Tuesday's annual meeting, the proposal won just 32.2% of the vote.

"Our power is probably shrinking a little bit,'' said David Eaton, vice president of proxy research for Glass Lewis.

ISS and Glass Lewis dominate an industry that evolved to bring a critical lens to the management proposals that mutual funds and asset managers traditionally had rubber-stamped in corporate elections.

Money managers may invest in dozens of companies, and many have relied on ISS and Glass Lewis for a second opinion about how to vote on ballot issues like shareholder proposals, the election of directors and merger deals.

ENLARGE

Those investment firms, however, are doing more of the work themselves. BlackRock Inc.,BLK-0.72% the world's largest money manager by assets, relied more on proxy advisory firms until it bought Barclays Global Investors in 2009. Barclays had its own team of corporate governance specialists, which now handles research on companies across the world for the entire company, a spokesman said.

BlackRock has become more vocal on corporate governance issues. Last year, it mailed a letter to 600 of its biggest holdings urging the companies to meet with BlackRock before meeting with proxy advisers.

Vanguard Group Inc., the biggest mutual-fund firm by assets, employs about a dozen analysts to research companies year-round, said Glenn Booraem, a principal and fund controller. ISS and Glass Lewis reports represent only one tool for making voting decisions, he said. "Their recommendations don't determine where we end up," Mr. Booraem said.

In recent years, Vanguard has communicated more often with companies it invests in, Mr. Booraem said. Chief Executive F. William McNabb III has written companies explaining Vanguard's position on certain issues, he said.

ISS, founded in 1985, has 1,700 clients that manage about $25 trillion in assets world-wide. Its corporate-election recommendations "matter more now than they have ever mattered,'' said President Gary Retelny. "Ninety-four percent of our clients renew every year."

ISS was owned by RiskMetrics Inc., a J.P. Morgan spinoff, before it was acquired by MSCI Inc.MSCI0.28% in 2010. The firm has long been criticized for selling corporate governance consulting services to some of the same companies that are the subject of its voting recommendations. ISS said it has adopted policies to guard against possible conflicts of interest.

Glass Lewis is owned by the Ontario Teachers' Pension Plan Board, a Canadian pension fund. Founded in 2003, the firm counts as clients more than 900 institutional investors that manage more than $15 trillion world-wide. Glass Lewis lacks a consulting arm.

Proxy advisers' advice has carried considerable clout. According to a 2002 study published in the journal Financial Management, a negative recommendation on management proposals from ISS influenced between 13.6% and 20.6% of the vote.

Their influence increased after a 2010 federal law required companies to give shareholders a vote on how they pay executives. Companies don't have to act on those say-on-pay votes, but poor outcomes can embarrass board members and fuel wider shareholder discontent.

About 70% of 110 large and midsize companies said their executive-pay practices are influenced by proxy-advisory firms, according to a 2012 study co-led by the Conference Board, a New York research group.

Hewlett-Packard Co.HPQ-0.33% is a typical example. ISS had opposed the technology company's pay practices this year, criticizing the board for not taking into account an $8.8 billion write-down related to a flawed acquisition when determining incentive awards. H-P modified its compensation plan just days before the annual meeting. ISS responded by dropping its negative recommendation. The say-on-pay vote passed. An H-P spokesman declined to comment.

But that influence is starting to change the picture. Companies eager to head off "no" votes are more aggressively dispatching top executives and board members to court investors and argue against ISS's and Glass Lewis's recommendations. The outreach is having an effect.

"We have seen less failed say-on-pay votes this year than either of the previous two years,'' said Mr. Eaton, the Glass Lewis executive. Glass Lewis and ISS also said they are making proportionately fewer negative recommendations on pay votes this year.

Smaller investors still rely heavily on proxy advisers, in part because they often lack the resources to fund their own analysts.

David Royal, deputy general counsel of Thrivent Financial for Lutherans, an insurance company and mutual-fund firm with $85 billion in assets under management, said ISS reports help guide its thinking about corporate ballots. Thrivent's stakes in companies are often too small to justify doing all the research itself.

"We can't justify spending an inordinate amount of time on it," he said.

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